Ongoing geopolitical challenges have triggered talk about companies leaving some offshore suppliers to reduce supply chain vulnerability. The reality is that companies are not necessarily leaving those suppliers, but they’re not relying on them, either.
“Manufacturers are keeping the vendor or supplier in China but finding another one somewhere else.”
Grant Thornton Manufacturing Industry National Leader Kelly Schindler asked her team if they were seeing a mass exodus from China. “Almost all of them said no. Instead, they are seeing the creation of redundancies. Manufacturers are keeping the vendor or supplier in China but finding another one somewhere else.”
This recent reconsideration is the convergence of many factors over many years. The cost advantage some nations offered has become less pronounced. Other nations — in APAC, Europe and closer to home — are becoming competitive, especially given tariffs and other incremental costs when doing business in countries where there are political challenges. Piracy and terrorism have escalated the challenges with ocean freight in the Middle East and Africa. Meanwhile, domestically, automation has enabled manufacturers to reduce labor costs.
Grant Thornton CFO Advisory Principal Anthony Bonaguro said, “With the increase in food and beverage prices, along with disruptions in the supply chains due to the Russian-Ukraine war, organizations are creating alternatives in their supplier base to remain competitive.” Grant Thornton Growth Advisory Director Brad Hulbert said, “I’ve seen it in my career. Ten to fifteen years ago, everybody was trying to single-source out of APAC. Over the last five to seven years, that entire mindset has shifted.”
This shift gained more momentum when the pandemic accelerated changes in two ways:
- First, it showed the vulnerability of the pre-2020 supply chain to disruption. "In industrial manufacturing, disruptions have become the norm. So, it's imperative that organizations become more resilient by strategically implementing reliable alternatives throughout all of their supply chain operations,” said Grant Thornton Risk Advisory Managing Director Durran Dunn.
- Second, in the pandemic’s aftermath, manufacturers stocked up on inventory, increasing their carrying costs for warehouse space and highlighting the distance between the warehouse, which generated expenses, and the end customer, who provided cash. “Chemical companies with mature supply chain and production planning processes know the precise impact of shortages or delays. To help ensure resiliency, it’s important to balance ‘Just-In-Time’ with ‘Just-In-Case,’” said Grant Thornton Growth Advisory Senior Manager Stephen Delano.
Now, the U.S. Commerce Department has indicated that Mexico surpassed China as the largest source of U.S. imports. There’s a parallel to the global trend of reconsidering supply chains within the United States, as companies scrutinize high-tax jurisdictions like California. For domestic relocations, tax policy, not disruption, is a major driver of relocation.
Manufacturers need to consider all of these factors, if they haven’t already begun. "Automotive manufacturers experienced a semiconductor chip shortage during the pandemic, and they're contemplating post-pandemic financial distress from suppliers straining the supply chain,” said Grant Thornton Advisory CFO Advisory Director Greg Bryen. "It takes time to find new suppliers with the quality assurance and availability they need."
Whether your supply chain is domestic or international, strategic redundancy, resilience, and relocation are now essential.
Many stakeholders, many factors
“Almost every time I see a supply chain relocation go poorly, it’s because companies have disjointed communication.”
While the decision will often land on the COO’s desk, the CFO will be concerned with tax implications. Whoever leads the effort will be wise to incorporate a range of perspectives. Hulbert said, “The biggest pitfall I see is siloed communications across functions — the company’s not making a holistic business decision that all executives accept and understand. Almost every time I see a supply chain relocation go poorly, it’s because companies have disjointed communication.”
Of course, each manufacturer faces a distinct set of facts. But similar strategic, operational, tax and executional considerations apply to each decision to rethink one’s supply chain.
Strategically, companies may proceed via construction or acquisition, and with one or more locations. Construction allows a company to design the facilities to optimize — and digitize — its workflow, but the costs can be high, and it takes time. Acquisition expedites the process but could pose integration difficulties. Multiple locations also mean maintaining multiple relationships.
Operationally, companies wanting to relocate — or create a new location — should carefully weigh a plethora of relevant factors. That means considering the availability of labor with the necessary skills; the cost of labor, construction, and land; the sufficiency of the local infrastructure, including heavy truck, rail and water options; the proximity to suppliers and end customers; and the area’s specific regulatory and general business climate. When these factors are considered, many companies locate on the Pacific, Gulf and Atlantic coasts.
Taxes and timing
Tax differences are obviously a part of this mix, but they’re not everything. Domestic relocations highlight the fallacy of relying too exclusively on tax considerations.
“As the tax differences become clearer between the states, there’s a lot of evaluation of different locations, especially Florida and Texas, but there’s a lot more to the analysis than just finding the state with the lowest tax rate,” said Grant Thornton Tax Managing Director Drew VandenBrul. “There are reasons to be in New York and California that transcend tax considerations.”
“I’ve seen a wide variety of issues, from missed incentive opportunities to the inability to find the right labor force,” VandenBrul said. He cited one example of a company that located a plant for tax reasons only to discover their very heavy products couldn’t be legally transported over the roads around the plant.
Global tax considerations include general issues such as domicile and tax entity selection, as well as direct and indirect taxes, withholding taxes, transfer pricing strategies (including locations and profit realized), regulatory compliance, exposure to aggressive enforcement, transparency and reputational risk. The need for transparency increases if the company is considering a historic tax-risk area or tax-sensitive structures. Companies should consider both current laws and possible future ones, especially in dynamic political environments.
“Tax authorities in the United States and globally are stepping up enforcement efforts, leaving organizations with an increased exposure to tax controversy. Changing supply chains can heighten that risk.”
The political volatility of taxes may not be reflected directly in legislation. Grant Thornton International Tax National Managing Principal David Sites observed, “Tax authorities in the United States and globally are stepping up enforcement efforts, leaving organizations with an increased exposure to tax controversy. Changing supply chains can heighten that risk.”
On top of enhanced enforcement efforts at the national and local levels, the OECD’s Global Minimum Tax initiative, known as Pillar 2, has taken hold in 2024, issuing a series of new tax challenges for global organizations. The Pillar 2 system targets low-taxed income, seeking to ensure large multinationals pay taxes of at least 15% of their income. This added layer of complexity further enhances the global tax risk associated with supply chain reorganizations.
Domestic tax considerations tend to fall into two buckets. “The first are the widely publicized ones: corporate tax, sales and use taxes, property taxes, personal income taxes for employees, and apportionment,” said Grant Thornton Tax Senior Manager Patrick Skeehan. “But there is a less obvious level of tax considerations — local issues and negotiated incentives that may not be widely available, and even pending legislation.”
Because these are more malleable, the timing of the tax discussion is important. VandenBrul painted a worst-case scenario: “You get too far down the path and you’ve lost your leverage, you’ve lost the opportunity to pursue incentives. Maybe you’ve made all the other decisions properly, but then you’ve left a whole lot of money on the table because somebody put out a press release and then you come back in and say, ‘I wonder if there are incentives.’”
Factors to consider in supply chain decisions
- Strategic:
- Construction or acquisition
- Relocation or redundancy
- Operational:
- Availability of labor with the necessary skills
- Cost of labor, construction and land
- Sufficiency of the local infrastructure, including heavy truck, rail and water options
- Proximity to suppliers and end customers
- Specific regulatory and general business climate
- Tax, General:
- Domicile
- Tax entity
- Timing of incentives discussion
- Tax, Global
- Direct and indirect taxes
- Withholding taxes
- Global minimum tax
- Transfer pricing strategies (including locations and profit realized)
- Regulatory compliance
- Exposure to aggressive enforcement
- Transparency
- Reputational risk
- Tax, Domestic
- Corporate tax
- Sales and use taxes
- Property taxes
- Personal income taxes for employees
- Apportionment
- Existing incentives and credits
- Negotiated incentives and credits
- Local issues
- Pending legislation
- Executional
- Leadership
- Integration across departments
- Buy-in
- Facility design
- Digital optimization
- Relationship-building and management
From deal to real
Once the deal is landed, the work done up front to involve the whole team can really pay off. If the location is newly built, it can be optimized for both physical and digital workflows. If it’s an acquisition, the heads of relevant functions can take steps for a smooth integration.
The benefits can redound for years. Of course, managers will continue to find plenty of reasons to lose sleep. But supply chain disruption is less likely to be one of them.
Contacts:
David E. Sites
National Managing Principal, International Tax Services
Grant Thornton Advisors LLC
David leads the firm's International Tax practice, which focuses on global tax planning, cross border merger and acquisition structuring, and working with global organizations in a variety of other international tax areas.
Washington DC, Washington DC
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Retail & consumer brands
Service Experience
- Tax
- International Tax
Anthony Bonaguro
Partner, National Accounting Advisory Services International Business Center Director
Partner, Audit Services, Grant Thornton LLP Principal, Grant Thornton Advisors LLC
Anthony has 20 years of experience working in a variety of industries, including services, distribution, manufacturing and technology.
Chicago, Illinois
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
Service Experience
- Audit & Assurance
Drew VandenBrul
Managing Director, Tax Services
Grant Thornton Advisors LLC
Drew VandenBrul has over 26 years of experience as a state & local tax professional advising companies across all industries on complex Pennsylvania and multistate tax planning, tax controversy, transaction and compliance matters, including income, franchise, realty transfer and sales & use taxes.
Philadelphia, Pennsylvania
Industries
- Construction & real estate
- Healthcare
- Manufacturing, Transportation & Distribution
- Private equity
Service Experience
- Tax
- State & Local Tax
Patrick Skeehan
Senior Manager, Tax
Philadelphia, Pennsylvania
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